How to make smart investments in cryptocurrencies?

Since the early days of Bitcoin, investing in cryptocurrencies has been met with a blend of caution and curiosity. Notable individuals like Bill Gates, Milton Friedman, and a lot of others have come to the forefront of digital currency, not just because of the de-centralized nature of cryptocurrencies but also because of the evolving times. The fact that an algorithm instead of a government regulates cryptocurrencies has made it more interesting.

Cryptocurrencies have become more valuable over time—a good example is Bitcoin. New cryptocurrencies like Ether, Litecoin, and subsequent currencies have made people excited to come on board the “crypto train,” especially individuals who missed the Bitcoin train during the early 2008s.

The questions people tend to ask about cryptocurrencies include: Is cryptocurrency a good investment? What do I need to know about cryptocurrencies? The subsequent paragraphs will address primary and secondary issues you need to consider before investing in any cryptocurrency.

Primary Issues

Market Cap and Trading Volume

Put simply, a certain cryptocurrency’s market capitalization is indicated by the total worth of all its coins in circulation at a particular time. Trading volume indicates the value of daily traded coins. A cryptocoin with a high market cap has high value per coin and would likely be a good buy. Therefore, when making a decision on which cryptocurrency to invest in, consider a combination of high daily trading volume in relation to the total market capitalization.

Verification Technology

Cryptocurrencies differ in the technology backing them. There are two common verification methods: Proof of Work (PoW) and Proof of Stake (PoS). While some cryptocurrencies utilize either of the two for verification of their transactions, current developments has led to digital currencies making use of a combination of both. An example is DeepOnion, which is a hybrid cryptocurrency based on the Tor anonymity network. The verification method used will largely determine how fast transactions get verified. PoS addresses the limitations of PoW by assigning verification authority to the users with the largest share of the cryptocoin on the blockchain while PoW utilizes energy within a significant time frame to solve a complex mathematical problem.

Acceptance

How would you feel if your money couldn’t get you anything because no one wants to accpet it? Terrible, isn’t it? When making a cryptocurrency investment decision, be sure to gauge its acceptance rate. No retailer was accepting Bitcoin in 2008 when it launched, but several online stores now accept it as a payment method. In fact, predicting the future acceptability of a new entrant into the market could be difficult. At this point, discretion matters. Looking through the white paper of a new cryptocurrency could give an idea about the future.

Transportability

Generally, cryptocurrencies can be easily moved without anyone noticing, although this differs across the various currencies in the market. Some digital currencies can be stored only in desktop wallets; others can be used on the go with mobile wallets. A coin that allows storage only in desktop wallets shouldn’t be written off. However, if you seek to send and receive cryptocurrencies on the go without having to use your computer, you might want to consider the ones with ease of movement. However, this decision shouldn’t be taken in isolation of other factors.

Supervision

We all know how Satoshi, who was credited with the development of Bitcoin, literally vanished. At the moment, no one owns Bitcoin in spite of its tremendous success in the crypto market. However, things have changed, and most of the new coins in the market today have certain individuals laying claims to their ownership. Before deciding on the cryptocurrency to invest in, research the development team and their plans. With this information, you will have an idea of the kind of support available to the community. Although having reputable individuals on the development team doesn’t guarantee the success of a cryptocoin, knowing a bit about them can give a hint about the future.

Secondary Issues

Cryptocurrency Prices Are Speculative

The prices of Bitcoin, Ether, Litecoin, and a lot of other cryptocurrencies are incredibly volatile. The price can rise and plummet exponentially at any time without any explanation. The major problem with Bitcoin and other cryptocurrency is that you never know for sure how the prices will work. Bitcoin is a relatively new currency—it was brought to light in 2008—and there are newer cryptocurrencies around. The truth is that the crypto market could crash at any moment, and your investments could crash alongside it. Coins are not traded based on any sort of fundamental or recognized metric (they are essentially valued based on pure supply and demand).

You can justify the price by taking a look via time-series analysis, but you cannot easily predict its prospective prices with any certainty. If you want to invest in Bitcoin or other cryptocurrencies, the prudent way to invest is to buy at low rates and sell at high rates, keeping in mind that there is always the possibility that the low may not always go back up. In addition, don’t invest what you cannot afford to lose.

Crypto Investors Are not Protected by Law

Cryptocurrencies, unlike a lot of other fiat (legitimate) currencies around the globe—such as the US dollar, yuan, and rubles—are not regulated in any way by central banks. Hence, many people perceive cryptocurrency as something similar to monopoly money since it is not a fiat currency, neither is it based on something of tangible value like gold, silver, bronze, or other precious metals. The worth of these cryptocurrencies is exactly what people perceive. These expectations, alongside the forces of supply and demand, are what lead to cryptocurrency’s fluctuations.

While in a sense this applies to any currency, the value of cryptocurrency is much more volatile than any other form of money because of the chaotic nature that stems from not being regulated by a government or other central body. Sometimes, the entire price hike associated with cryptocurrency is a result of sheer excitement, and sometimes a drop can be rational and based on recent events. Other times, it is because not a ton of buyers, sellers, and big investors are literally buying and dumping coins. This makes cryptocurrencies very susceptible to manipulations; hence, its volatility.

Cryptocurrency Exchanges Can Be Difficult to Use and Risky

Cryptocurrency exchanges are like banks. If you have read all of the above and decide to invest in cryptocurrency, you ought to know what exchange to use. There is a plethora of crypto exchanges out there—including Coinbase, Bittrex, Bisq, Kraken, and Poloniex—that can be used to sell cryptocoins such as Bitcoin, Ether, and Litecoin. Some of these cryptocurrencies are relatively easy to use, while others are very difficult for new users. Some are specifically for margin trading while others do not have that feature. Bitmex, for example, is used mostly by those into margin trading and those involved in Bitcoin derivatives, and it can be very daunting to use. Coinbase, Cex.io, Coinmama, and some other exchanges are very beginner friendly with nice interfaces that can enable you to understand crypto trading without many hassles. These exchanges own cryptocurrencies and promise you also own a share of the cryptocurrency. If these exchanges go bankrupt, you may not access your investment.

Furthermore, most exchanges usually have their own cryptocurrency wallets. Those that do not have a crypto wallet usually make recommendations. There are various crypto wallets out there, and they fall under different categories. These wallets are virtual wallets used to store and exchange virtual currencies. Some wallets also perform the added function of converting one cryptocurrency to another form of cryptocurrency—for example, converting Bitcoin to Ethereum or Litecoin. After investing in these digital currencies, it is best to store them in your wallet because it will save you from going bankrupt if your crypto exchange goes down.

On a final note, Bitcoin, just like other cryptocurrencies, is surrounded by a lot of speculation. Many notable individuals have come out to defend and show their interest in cryptocurrencies. At the same time, however, a lot of other notable people have made known their own distaste for Bitcoin and cryptocurrency in general. Recently, the CEO of JP Morgan (a banking firm in the United States) gave very negative statements about Bitcoin and expressed his cynicism about the platform.

Cryptocurrencies are a solid asset, although still very prone to shocks. However, many things can still go wrong. The main issue most people seem to have with cryptocurrency lies in its safety, volatility, spoofing, and the absence of government regulation. While this might seem a big red sign that is discouraging to some people, it also poses a big source of wealth-accumulation potential to another set of people. It boils down to what you feel and think is right for you, just like other forms of investments.

5 Comments

Investing in Bitcoin and other cryptocurrencies is the new craze. Even older investment heavyweights such as Bill Gates and Milton Friedman have entered this cautious form of investment attracting even more attention to the industry. However, for one to make tangible returns they must consider primary factors such as acceptance, verification technology and market cap/trading volumes. Furthermore, secondary issues such as difficulties in using some currencies, cryptocurrencies not monitored or protected by law, and speculative practices in the cryptocurrency environment must be considered.

The guide is full of useful information. The article gave me beautiful answers to some of the accumulated issues for a long time. This writing has brought about a lot of changes in my next investment concern.

I have found acceptance to be an important factor to consider when investing. It is hard in the short-term to invest in a cryptocurrency that you cannot turn around and use with major retailers. As mentioned in the article, this was the case with Bitcoin in 2008. That has changed somewhat, but can still be limiting. You need to be prepared to wait for producers to catch up with the market.

I’m totally on Robert Kiyosaki’s philosophy. I’m not buying Bitcoins because they can grow in value. I’m buying them because people are more aware of them, they are accepted everywhere now and I’ve an option to buy things in case they drop in value. As I know all currencies have zero face value (yes even US dollar) because they are not money. The day I learned money and currency are different was the day I became a true investor.

I will be recommending this guide for all I know who are interested in cryptocurrencies. So many people are interested in bitcoins, but are truly frightened by the what-ifs and the uncertainties. I am looking at cryptos as a longer-term investment strategy and not being concerned with short-term gains. The world is definitely changing and the older world order is crumbling (right before our eyes), we have to look and move forward intelligently and prudently. Crypto-currencies will soon become less of an enigma and more of a mainstream monetary exchange system.